Cash-Out Refis Quickly Being Replaced by Cash-In Loans
(02-02-10)
Although mortgage rates have remained extremely low, there is a shrinking pool of eligible borrowers who are able to take advantage of them. Refinance applications continued to make up the majority of mortgage originations with a new trend emerging whereby borrowers are actually bringing cash in to the transaction to pay down their loan in order to complete the refinance. It was reported in the 4th quarter of 2009 that approximately 33% of all refinance borrowers brought cash in to reduce their principal loan balance. Bringing cash into the transaction to close the deal is not always an option taken up voluntarily by the borrower but in many cases is a requirement of the lender to approve and subsequently close the loan. Conversely the cash-out loan is becoming a vanishing breed as these deals have fallen to their lowest levels since 1985 right before the Tax Reform Act of 1986 was passed by Congress which phased out the deduction for consumer interest, thereby encouraging homeowners to shift all their debt obligations onto their homes through the home equity line of credit. In 2009 the total amount of equity cashed out by homeowners reached just under $70 billion, while consumers bringing cash in to close their refinance loans topped $100 billion.
Declining home prices, along with the disappearance of the popular no-cost loan, has helped contribute to the need for borrowers to bring cash in to pay down the principal balance of their loans. With real estate prices in nearly 20 major metropolitan regions having fallen over 32% from top to bottom, climbing back to the levels reached at the peak in the second quarter of 2006 is going to be a very slow process and could take well over a decade. With incomes still declining on a relative basis, coupled with a return to real world economics where most asset values are based on a multiple of earnings and incomes, this process may end up being a painfully slow one.
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